Paycheck Protection Loan Forgiveness Process
Have you received a Paycheck Protection Loan? Congratulations!
It is our hope that the loan provides relief for the financial pressures on your business, and allows you to continue supporting the employees who make your business possible.
Our firm has received a plethora of questions about the PPP loan forgiveness process and have tried to address many of those questions here. It’s an intimidating task to summarize the items that may be most important to you, but hopefully you will find this helpful. I know it’s long, but please read through it when you have the opportunity.
There are still many questions that remain unanswered by those administering the program, but they have promised future guidance. We will provide further updates as more information is released. Also, please be careful what sources you listen to regarding this program. There is a LOT of misinformation out there!
Time-Sensitive Special Rule for Partnerships. If your business operates as a partnership (i.e. files Form 1065), your loan amount can be based on the wages you pay your employees AND the self-employment earnings of the partners (who are not paid via payroll). Permission to include partners was added later in the application process so if your original loan application only included your employees, you may be eligible for more loan funding if you apply ASAP (estimated within the next week or so). Please contact our office or your bank for more information.
The SBA released an 11-page loan forgiveness application this past weekend (copy attached). The application must be filled out with the relevant expense information and submitted to your bank. You may apply for forgiveness after the end of your 8-week loan term until sometime this fall (yet to be confirmed). Your bank will make the decision about loan forgiveness, and must do so within 60 days of your application. Any amount not forgiven will need to be paid back according to the terms of your loan – typically within two years at a 1% interest rate.
The loan must be necessary. If you have been watching certain news outlets, you have seen some outcry about many not-so-small and publicly traded companies who received loans. It has become more clear that this was not the intent of Congress, even if the rules were written in such a way as to make it possible. Their primary focus was the certification from the original loan application, which reads “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
After quite a bit of back-and-forth about how to define “necessary”, the SBA has clarified that any loans under $2 million are deemed to meet the financial need requirement based on their self-certification in the loan application and they do not plan to audit these businesses on this topic. As a best practice, our firm recommends that you document your financial uncertainty or financial need at the time of application, to keep in your own files. These notes may include the amount of savings your business had on hand at that time and what your typical expenses are each month, as well as the outlook for your industry at that time (i.e. you may have needed to cease operations for a time, or expected reduced sales). We do not anticipate that you will need to submit this narrative with your forgiveness application.
To determine your loan forgiveness, you will need to walk through the following items:
Calculating Forgivable Payroll Costs, Step 1
Determine your total eligible payroll costs. This can be calculated by filling out various worksheets on the application pages 5-9. In general, it includes all wages and salaries paid to employees during your 8-week loan period, but certain limitations apply. (Note that there is currently bipartisan support in Congress for extending the 8-week period to include more time, so this may change).
Employee Wage Limit: Wages in excess of $100,000 on an annualized basis will not be counted. Consequently, a maximum of $15,385 per employee can be included ($100,000 / 52 weeks * 8 weeks = $15,385). This applies to employees and owners who are paid via payroll (corporations and S-corporations). Consequently, owners who earn over $100k/year cannot boost their own pay in order to maximize forgiveness. Payments made to independent contractors of the business do not count.
Partners and Self-Employed individuals: Special rules apply to partners and self-employed individuals, who are not paid through company payroll. In your case, forgiveness is a specific formula based on your 2019 income, and is not dependent on 2020 income, draws, or distributions from the business. Your forgiveness amount is your 2019 self-employment income * 8/52.
Eligible Wage Costs: For this step, there is no difference for wages paid for hours worked, and wages paid for sick time or other paid time off. All wages, salaries, commissions, tips, sick time, vacation time, and severance pay may be considered. (Exception: If you paid sick time or family leave time to an employee for a COVID-19 related reason and will claim a tax credit for this pay under the Families First Coronavirus Response Act, it cannot be included in your PPP forgiveness calculations).
Timing: Your 8-week period starts on the date you received the funds. However, some businesses may be eligible to use an “Alternative Payroll Covered Period”, which would start the 8-week period on the first date of the first pay period after you received the funds. Only the costs paid OR incurred within the 8-week period are eligible (which is a departure from earlier guidance that said costs had to be paid AND incurred during that period). This provides more flexibility, whereby some costs may be eligible even though they were incurred BEFORE the covered period but paid DURING the period. Other costs may be eligible if they were incurred DURING the period but paid AFTER the period (but no later than the date on which they would normally be paid, for example on the following pay day).
Data Collection: I anticipate that the national payroll companies are in the process of building the reports that you will need to collect and report the relevant payroll information. If you do not use a national payroll company, your payroll software (QuickBooks or similar) should be able to produce helpful reports, but you will need to generate some of the calculations manually.
Retirement Plans: In addition to wages, a business can include its employee retirement plan contributions in payroll expenses. It is not fully clear, but it appears that contributions on behalf of business owners cannot be included. For employees who make more than $100k/year, these expenses may still be included in addition to their compensation.
Health Insurance: Premiums paid by the employer for a group health insurance plan, net of the contributions made by employees, can be included in payroll costs. It is not clear whether premiums for business owners can be included.
Payroll Taxes. Your Arizona unemployment taxes incurred during the 8-week window may be included in payroll costs. Employer FICA taxes (the employer’s portion of Social Security and Medicare tax) may NOT be included.
Calculating Forgivable Payroll Costs, Step 2: Reduced Average Wages or Annual Salary
You may be required to reduce your loan forgiveness amount if a reduction in wages, for an employee making less than $100,000 per year, over the 8-week period is in excess of 25% of the total salary or wages of the employee during the period from January 1, 2020 through March 31, 2020. This calculation gets figured for each employee on the PPP Schedule A Worksheet on page 9 of the application.
I am not going to try to go through this calculation in detail, because it gets really complicated. If this may apply to you, check out this article from Tony Nitti, one of our favorite tax writers at Forbes, for a walk-through and some examples: https://www.forbes.com/sites/anthonynitti/2020/05/16/sba-releases-paycheck-protection-program-loan-forgiveness-application-a-deep-dive/#3bf6c2281b2f
Calculating Forgivable Payroll Costs, Step 3: Reduced Workforce
If you maintained the same number of full-time equivalent employees and maintained the same level of payroll cost throughout the 8-week period, you should not need to make an adjustment to the payroll expenses calculated in step 1. However, if you reduced your employee count and have not restored it by June 30, you may need to reduce your forgiveness, even if you spent the “right” amount on payroll costs. To figure this out, you’ll need to know your:
Full-time equivalent. Any employee who works 40 hours or more per week counts as 1 full-time equivalent. Anyone who works fewer than 40 hours per week counts pro-rata; for example, someone working 30 hours per week counts as 0.75 of a full-time equivalent.
Simplified Method: Any employee who works 40 hours or more per week counts as 1 full-time equivalent. Anyone who works less than that, regardless of the number of hours, counts as 0.5 full-time equivalents.
Restoration: In general, if you increase your full-time equivalent employee count before June 30, 2020, this calculation will not count against you when figuring your forgiveness amount.
Forgiveness of Non-Payroll Costs
No more than 25% of your forgiveness amount can relate to non-payroll costs (although changing this breakdown seems to have bipartisan support in Congress, so it may change). For example, if your loan is $100,000 and you have $70,000 of qualifying payroll costs and $40,000 of non-payroll costs, your forgiveness will be limited to $93,333 and you will need to pay back the difference ($93,333 * 75% = $70,000).
These costs include:
Interest on Covered Mortgage Obligation: This includes any indebtedness or debt instrument incurred in the ordinary course of business that was incurred before February 15, 2020. It includes debt on both real and personal property (real estate and equipment, for example).
Covered Rent Obligation: Includes rent obligated under a lease in force before February 15, 2020. So far, there are no restrictions for rent paid to a related party (for example, a business who pays rent to a separate entity owned by the same individual).
Covered Utility Payment: Payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
It appears that payments paid DURING the covered period owed for previous periods are includable. Likewise, payments incurred during the period but made AFTER the end of the period but by their next due date, can also be included.
Other notable items
If you received a PPP loan AND a deposit from the Economic Injury Disaster Loan (EIDL) program, your forgiveness will be adjusted. Most EIDL deposits were made for $1,000 per employee, up to a maximum of $10,000. The amount you received will reduce your eligible PPP forgiveness. For example, if you qualify for $100,000 of PPP forgiveness under all other rules, your forgiveness would be reduced to $90,000 because you also received a $10,000 EIDL grant. This is not part of the forgiveness application so it is assumed that the SBA will make the required adjustment.
Expenses paid with forgiven PPP loan proceeds will not be tax deductible in 2020. For example, if 8 weeks of your payroll costs are forgiven, then next year’s business tax return will need to remove those expenses from your deductible payroll costs. This concept is up for debate right now as several Congresspeople have opposed the IRS’ position on the issue, indicating that their intent is for businesses to be able to deduct these costs. Stay tuned.
Spreadsheet: The American Institute of Certified Public Accountants (AICPA) has created an Excel worksheet to assist with the tracking and calculation of relevant figures. A copy of this worksheet, reflecting guidance issued through May 15, 2020, is attached. This document will be updated regularly as new guidance is released, so if you choose to use it, please check back periodically to https://www.aicpa.org/sba and select PPP loan forgiveness calculator (Excel) for the most updated version.
If you made it this far, congratulations! We appreciate your determination. If you’re overwhelmed by this process, we are here to help. Our goal is to help you navigate this process and successfully obtain as much loan forgiveness as possible to provide you with the resources you need to continue to serve the Southern Arizona community for a long time to come. It has been encouraging to watch our lawmakers come together in rare bipartisan form to support this program and rally behind small business leaders like yourselves. It is a testament to the value that small business provides to our culture and our economy!
Please let me know any ways that we can help. Have a great Memorial Day weekend!
Mikala Jansen, CPA
Mikala Jansen, CPA | 05/22/2020